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Central and local government must create a level economic playing field across the UK

3 min read

SMEs are the backbone of the UK economy. They contribute to the majority of jobs and a significant share of GDP, and the high-growth companies that will be the large corporates of the future rise from their ranks.

However, their access to finance suffers from significant disparities, in particular in their ability to raise equity financing.

MPs and government departments must act now to ensure that the levelling up agenda becomes a reality. It is time to take a dual approach, with local authorities working hand in hand with central government to create a more equitable economic playing field across the UK.

Oliver Wyman recently conducted a study that explored these regional disparities to develop a more nuanced understanding of the drivers to investment allocation and spatial biases. The report found that there is a 35% funding gap for businesses between the UK regions most deprived of investment and the rest, despite contributing to over 45% of the UK’s Gross Value Added (GVA) and hosting 50% of SMEs.

In particular, three key "effects" have been identified to elucidate the regional equity bias: network effects, cluster effects, and wealth and proximity effects. These shed light on why certain areas with a dense concentration of businesses receive a disproportionately high amount of equity financing, why equity investment tends to gravitate towards regions specialising in specific technologies, and why regions with higher household wealth receive more financing.

Regions boasting a larger concentration of SMEs typically enjoy superior access to equity finance compared to other regional characteristics. Networks and cluster-based policies therefore play a crucial role in sustaining regional economic development. Additionally, different regional clusters across industry sectors witness varying levels of equity financing influx. Affluent regions tend to secure better access to equity financing. However, fostering local networks of business angels may not necessarily mitigate existing imbalances. Analysis of business angels' investments distribution across the UK reveals deviations from standard expectations regarding the proximity of early-stage investments, challenging prior assumptions.

To address these issues, policymakers must urgently take action to support SMEs' access to finance and boost productivity and innovation in lagging regions. By doing so, the UK can unlock the potential gains in growth and equity that come with increasing the number of innovative SMEs in underfinanced areas.

There are three policy levers that local and central government and the industry could consider developing to grow the UK’s SME financing ecosystem and support regional economic growth.

Firstly, strengthen local governance and place-based initiatives by increasing regional pooling of capabilities and resources from across the local public sector to better attract investments in priority clusters and supply chains. Secondly, mobilise private and public sector capital by developing a joined-up approach to deploy funds at the local level, including financing agencies and innovation agencies, and coordinate third sector efforts to support upskilling of the workforce along relevant clusters and value chains. Finally, target central government policy, supporting actions, and data by working with development finance institutions to explore place-based development finance products and services to support businesses in line with local and cluster strategies.

While addressing regional imbalances requires sustained effort, strategic financing of businesses across the UK is pivotal. This approach fortifies our socioeconomic landscape, paving the way for accelerated growth and nationwide employment. By doing so, we can help level up our nation and build a stronger, more prosperous future for all.

Anthony Charrie is a Partner and Head of Oliver Wyman’s Government & Public Institutions practice in the UK.

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